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Tuesday, March 30, 2010

Balanced Scorecard

The balanced scorecard is a new management concept which helps managers at all levels monitor results in their key areas. An article by Robert Kaplan and David Norton entitled "The Balanced Scorecard - Measures that Drive Performance" in the Harvard Business Review in 1992 sparked interest in the method, and led to their business bestseller, "The Balanced Scorecard: Translating Strategy into Action", published in 1996.There's nothing new about using key measurements to take the pulse of an organization. What's new is that Kaplan and Norton have recommended broadening the scope of the measures to include four areas:• financial performance, • customer knowledge, • internal business processes, • learning and growth. This allows the monitoring of present performance, but also tries to capture information about how well the organization is positioned to perform well in the future. Kaplan and Norton cite the following benefits of using the balanced scorecard: • Focusing the whole organization on the few key things needed to create breakthrough performance. • Helping to integrate various corporate programs, such as quality, re-engineering, and customer service initiatives. • Breaking down strategic measures to local levels so that unit managers, operators, and employees can see what's required at their level to roll into excellent performance overall. Similarity to Hoshin PlanningThe balanced scorecard has strong similarities to Hoshin Planning or hoshin kanri, the organization-wide strategic planning system used widely in Japanese companies. Both seek breakthrough performance, alignment, and integrated targets for all levels. The balanced scorecard suggests which specific areas should be measured for a balanced picture, but this isn't contradictory to Hoshin Planning. One thing that the Japanese emphasize is "catchball", the process of give and take between levels that helps to define strategy in Japanese companies. The balanced scorecard method seems to be more of a one-way street -- the executive team creates the strategy, and it cascades down from there. One cautionary noteYou tend to get what you measure for, since people will work to achieve the explicit targets which are set. Dr. Deming feared this effect, noting that people would skew their work to meet particular incentive pay targets. For example, emphasizing traditional financial measures tends to encourage short-term thinking - like rigging shipping schedules to make the monthly sales look good, or aggressively discounting to meet year-end targets. Kaplan and Norton, recognizing this, urge a more balanced set of measurements, which is good. Even so, people will work to achieve their scorecard goals, and may ignore important things which are not on the scorecard. Or, if the scorecard is not refreshed often enough, what looked like an important goal in January may not be very germane in June. Kaplan and Norton recognize these risks, and they don't pretend that they have said the final word on scorecards.

The balanced scorecard forces managers to look at the business from four important perspectives. It links performance measures by requiring firms to address four basic questions:

(a) How do customers see us? - Customer perspective(b) What must we excel at? - Internal perspective(c) Can we continue to improve and create value? - Innovation & learning perspective(d) How do we look to shareholders? - Financial perspective